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Great buying opportunities from the big tech rout
The bad news for growth investors this year? US tech stocks have been routed in 2022. The good news for growth investors? US tech stocks have been routed in 2022, presenting buyers with potentially unique opportunities to invest in many high-quality tech businesses at prices they may not see again.
We highlight three such companies later, but first the background.
Both the Nasdaq Composite, which includes more than 2,500 companies, and the Nasdaq 100, the 100 largest in the Composite, have lost nearly 17% year-to date (at the close 17 April). That compares to an 8.4% fall for the S&P 500 and 4.9% decline in the Dow Jones, indices where ‘old economy’ financials, utilities, industrials and resources stocks have a much larger impact on performance.
It’s not new news that general fears that the pandemic recovery was fully priced in heading into the new year, coupled with concerns about inflation and higher interest rates, caused many of the biggest and most widely held tech names out there to fall sharply.
Throw in Russia’s invasion of Ukraine and its little wonder investors have lost their appetite for many global growth companies, tech in particular.
Yes, it’s fair to say that there are those that have taken a beating for good reason. One-time growth darling Netflix (NFLX:NASDAQ) seems to have waved the white flag in its battle for expansion, with subscriber numbers falling for the first time in a decade, the head on that blister bursting last week (20 Apr) when the stock dropped nearly 40% in a day.
Previous stay-at-home winners Zoom Video (ZM:NASDAQ), Mercadolibre (MELI:NASDAQ) – the Latin American online shopping giant – and Facebook-owner Meta Platforms (META:NASDAQ) have all fallen harder than the index. Former digital payments star PayPal (PYPL:NASDAQ) had been the Nasdaq 100’s biggest loser (until Netflix’s collapse). Its stock lost more than 50% of its value as investors pondered changes to its growth strategy and losing its deal as online payments provider of choice to its former parent Ebay (EBAY:NASDAQ), itself falling nearly 18%.
$1.3 TRILLION SELL-OFF
They’re part of a $1.3 trillion wipeout in market value for the Nasdaq 100, according to Bloomberg data at the end of March. The loss in value would be bigger now, and even tech megacaps – Alphabet (GOOG:NASDAQ), Amazon (AMZN:NASDAQ), Apple (AAPL:NASDAQ) and Microsoft (MSFT:NASDAQ) – are struggling to stem declines.
This shows that even many of the highest-quality tech stocks have been beaten down without the ugly headlines to blame. There are even a number of popular tech stocks which have seen share price declines despite earnings reports that have beaten forecasts and painted a positive outlook picture.
The point was succinctly made by Stephen Yiu in a The Times article on 16 April. The Blue Whale Growth Fund (BD6PG78) manager sees a new breed of ‘consumer staple’ company that offers unavoidable essentials in an increasingly digital world, naming Alphabet and Microsoft among them, yet as we have previously explained, they have fallen hard despite their defensive credentials.
In Yiu’s view, the fundamental strengths of companies such as these haven’t disappeared, and they may even have become stronger. But as the fund manager says, the contagion of economic malaise, and the fact that low-quality tech businesses have had a deserved markdown in value, has tainted the tech sector as a whole.
‘The resulting fall of high-quality tech companies’ share prices now offers brave investors an opportunity,’ he firmly believes. Yiu has previously said that Blue Whale Growth has been increasing its position in some names, such as Nvidia (NVDA:NASDAQ) Lam Research (LRCX:NASDAQ) and Atlassian (TEAM:NASDAQ).
THREE SHARES WORTH BUYING
So where are the bargains? Looking beyond the megacaps, which companies have a genuine claim to be babies chucked out with the market bathwater?
Align Technology (ALGN:NASDAQ)
2022 perf: -40.8%
Orthodontics probably sounds like a boring field to invest in yet in today’s modern world people are increasingly looking to technology for cosmetic enhancements, providing a structural driver for Align Technology. This is not about dental supplies, the core of Align’s business is its Invisalign transparent teeth straightener, which helps people improve their smiles more fashionably and more comfortably than traditional straightening solutions, like braces.
Invisalign allows patients get their teeth imaged by the company’s 3D scanner devices, which can be done from home, then the clinician moulds a transparent aligner body to the shape of their teeth, adjusted for the corrections that the person needs.
In 2021, it sold about 55% more of its Invisaligns than it did in 2020, generating nearly 60% more net revenue in the process. For 2021, its total income was $3.9 billion, while over the last five years Align’s annual net income has grown by 234%, a growth trend showing little sign of slowing.
Lam Research (LRCX:NASDAQ)
2022 perf: -35.3%
Lam Research is a supplier of unique semiconductor manufacturing equipment focused on meeting the industry’s escalating demands, especially given the increasing complexity of semiconductor devices. The Silicon Valley-based business designs specialist equipment that helps semiconductor manufacturers improve yields, lower costs, shrink processing time and reduce defects on microchips.
Traditionally big in memory chips, this is an area booming thanks to the rapid rise of cloud computing, big data, mobile devices and other connected world applications. Since data storage is the starting point of the digital economy, there is a huge demand for memory chips, particularly the more efficient variety. But technological advancements in areas like in-car electronics, 3D device architecture and advanced packaging technologies are also playing to Lam’s strengths.
Since 2015, revenues have gone from $4.6 billion to more than $14.6 billion (to 30 June 2021), while net income has jumped well over 300% to $3.9 billion or $32.90 per share. Next year, to 30 June 2023, the company is forecast to put up net income of $38.60 per share on $19.4 billion revenues, according to data from analytics platform Koyfin.
2022 perf: -23.9%
Often called the ‘Amazon of Latin America’, it runs an online shopping platform with delivery and payments built-in for users. It is by far the dominant player in the region with an estimated 30% market share, and its marketplace receives roughly 668 million monthly visitors, nearly four times more than the next closest competitor.
Local management expertise is crucial given the tricky topography of the region, a key barrier to entry for rivals (including Amazon, which has tried in the past), while Latin America remains far behind the US, Europe and Asia when it comes to digital commerce.
In 2021, Latin American e-commerce sales totalled $131 billion, according to eMarketer, but less than 40% of the population currently shops online. As that figure rises in the years ahead, e-commerce sales and digital payments volume should follow, and as the market leader in both cases, Mercadolibre stands to benefit greatly.
DISCLAIMER: The author (Steven Frazer) owns shares in Blue Whale Growth Fund referenced in this article.